3 Financial Foundations to Future-proof Your Utility

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Looking back on this 2006 article, “Will the water still run during a pandemic?” by the Center for Infectious Disease Research and Policy (CIDRAP), we get an interesting glimpse at the predicted effects of a global influenza pandemic. And they were on the money. One of the article’s greatest concerns: smaller water systems.

America’s Water Infrastructure Act does not require water systems serving less than 3,300 people to develop or update Risk Assessments and Emergency Response Plans. This is risky for small and rural water systems for many reasons including, very small (sometimes volunteer-based) workforces, difficulty achieving full cost-of-service pricing while maintaining affordability, and overall resource restriction.

“31% of systems cannot sustain losses for more than six months of current financial conditions.”

The predictions of the CIDRAP article have played out in the Rural Community Assistance Partnership’s (RCAP) recent survey. Across the United States, 1,137 small and rural water and wastewater systems were surveyed and it was found that “43% rely on one full-time operator or less”, and many systems were concerned about the health of their operators as they perform their roles.

The survey also found that 31% of systems, “cannot sustain losses for more than six months of current financial conditions.” Scary stuff as water is vital to human survival and proper hygiene to reduce the spread of infection.

While we are far from through this pandemic, RCAP’s survey gives us a sense of how much longer small and rural water systems can hold out–and it’s a short runway. So here are some actions that cash- and staff-strapped utilities can take now to extend that runway and ensure viability for the future.

First – Build a long-term financial model.

“Your Long-Term Financial Model is a visual representation of your financial sustainability plan and is the cornerstone around which conversations with elected officials should center.”

Why building an LTFM matters

If you haven’t done so already, as a prudent steward of your utility you should have a long-term financial model (LTFM). Your model should at least project over a 10-year horizon, but if you can extend to 25-years that’s even better. Forecasted figures are admittedly less reliable the longer they extend, but creating a long-term financial model will help you explore how small course corrections made today will have exponential impacts in decades to come. The shorter term your decision making, the more dramatic decisions will likely need to be to achieve your goals.

Even if the outlook is bleak and your utility is of the percentage who stated they could not continue sustaining losses for more than six months, with an accurate model you will be better equipped to plan for recovery. Your LTFM is a visual representation of your financial sustainability plan and is the cornerstone around which conversations with elected officials should center. A clear communication tool to gain consensus and cut through political noise.

Long range forecasting is also key to accessing grant and loan funding (a source you are likely looking to at this time). Here is a blog post on Unlock Grant & Loan Funding with Long-Term Financial Modeling.

How to build and LTFM

Many tackle this in-house with spreadsheets and there are numerous online guides to readily assist you. The benefit to a DIY approach is that there is no cost; a drawback is that this requires a significant amount of time depending on your spreadsheet proficiency, your model can easily break, and it will be limited in the amount of data it can process.

Waterworth can also help you build a baseline financial model in two hours, at no cost. We’re currently offering free access to Waterworth to help you recover from impacts of the pandemic. Once we’ve built your LTFM, you will have three months free access to our software to explore all of Waterworth’s features (Asset Replacement Scheduler, Rate Calculator, Community Rate Benchmarking – for many public services, not just water and wastewater).

At the end of the three months, we hope that you’ll be so impressed that you continue to use Waterworth for the financial management of your water system and other public services. But, if you decide Waterworth is not right for you, there are no hard feelings. We’ll be happy to have had the opportunity to meet and we’ll clear all your data from our servers.

Particularly if you are struggling with staff shortages, Waterworth is a great option. We meet with you remotely and bring the expertise and tools to make this process quick and easy.

Second – Review your cash reserve policy.

You may currently be leveraging reserve funds to cover revenue losses or perhaps wishing those accounts were more robust. No matter your situation, now is a good time to review your reserves policies and consider adding to those funds. We’ve created many resources to help you this. Primarily, we recommend our Developing Cash Reserves Policy white paper. This paper drills down into the specifics of how to set up various accounts with accompanying work sheets. Download the white paper here.

For a more general discussion of the importance of cash reserves, why they’re challenging, and how to reprioritize them, we also recommend this blog post.

Third – Communicate clearly and effectively.

“Your utility performs an essential service and has been supporting your community through an unprecedented global pandemic, you may find that there is increased goodwill that would be wise to tap into.”

Funding the replacement of aging infrastructure remains an issue despite current events. And while many elected officials may balk at the notion of increasing rates at this time, armed with your LTFM, you know when and to what degree this is necessary.

The key to managing reactions to rate changes, with all stakeholders, is effective, proactive communication. So, if you have not connected with your rate payers recently, now is a good time to open those lines of communication. Also, being that your utility performs an essential service and has been supporting your community through an unprecedented global pandemic, you may find that there is increased goodwill that would be wise to tap into.

When you are ready to begin developing your communication strategy and content, these posts can help:

Also, feel free to reach out to us directly for assistance with your utility’s communication. We have developed a Communication Water Rate Changes guide for Waterworth customers, complete with worksheets, that we would be happy to share with you.

By taking these fundamental actions, you are safeguarding and strengthening your utility for the future. You will also have established financial measures that can be built on and expanded when you have more time to devote to them. For now, these basic steps will help you work towards a financial sustainable utility.